In this week’s episode of the Federal Retirement Show, Val answers more of the frequently asked questions he hears at seminars and through emails.
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12.16.22: Audio automatically transcribed by Sonix
12.16.22: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.
Val Majewski:
Welcome to another episode of the Federal Retirement Show. I am your host, Val Majewski, with American Benefits Exchange. And today's episode, we're going back to frequently ask questions, FAQs, that you or federal employees, just like you have been asking us and our reps across the country recently. Now, not everything may pertain to you, but these are some of the things that we're hearing about now and think it's really relevant to your situation. So hopefully you find this information extremely helpful. If you do have questions that you want to be answered, submit them to us. You can do so via email. We can put that in the description of this episode. You can go on to the federal retirement show or sorry, just federal retirement show dot com and submit your request for information in the form on that web page. So let's dive into your FAQs and we're calling today's episode FAQ number two. So what is frequently asked questions? What are they? What are some of the concerns that you have? Well, if you've watched our previous episode, when it came to frequently ask questions, they were pretty basic. But recently, with the way that the world is going, the economy, inflation, the markets are going down. People have a lot of other concerns and not everything is directed towards that. But there are reasons why these questions are coming up. So we're going to dive into that and answer some of them for you today.
Val Majewski:
The first one. Now, this is a throwback to an episode we did about Roth and Roth IRAs, but been getting a lot of these questions lately about doing Roth conversions. The question specifically,should I consider a Roth conversion now? First, let's define what a Roth conversion is. You have traditional funds in your TSP and we're going to use TSP as an example. But this could be for any IRA that you have out there, previous 401 K, you have traditional funds. Now what are traditional funds? These are monies that have not yet been taxed. So when you made deposits into your IRA for one K your TSP. Those monies went in pre tax. You actually got a tax deduction on that deposit. Now if it's in TSP, you got matched money went into the account, but that money has yet to be taxed. And as you earn interest over time or your money grows, hopefully when you take that money out in the end, withdraw it and use it, you're going to be taxed on every dollar your contributions plus any earnings in the account. And if it's TSP, it's your contributions plus matching contributions plus any interest or growth that you saw in your account. All of that every dollar is taxed as ordinary income. So why have people been asking about Roth conversions? Well, first of all, what is it? A Roth conversion is a way to take traditional money, money that has not yet been taxed and tax it, turn it into tax-free money.
Val Majewski:
So one day it can be taxable money and instantly it can become tax free money. You converted it into a Roth. Pretty cool, right? Well, we'll get into the details of why or why not. That may be beneficial for you, but the idea is that you can prepay taxes. Now, why would federal employees, people in your situation, why would you want to prepay the taxes? And I've talked about this a lot in seminars and webinars and meetings that I've given with federal groups and federal agencies. And I ask this simple question and you can answer it yourself, and your answer to this question may determine your answer to the fake question of if you should consider a Roth IRA. The question is this Which direction do you think tax rates are going up, down or staying the same? Now, your answer may be different, but the consensus the majority of people that I've talked to say that taxes will be going up in the future. Now, if I ask them for justification about that, typically people are saying, well, the government has spent a lot of money, they've thrown trillions of dollars out there due to COVID and relief efforts. How are they going to recoup that money? The national debt is getting higher and higher. Well, they're going to bring in more tax revenue.
Val Majewski:
Usually that's how it works. So tax rates in the future could go up once they're eligible to do so. So if that's the case, then people are saying, well, I want to prepay my taxes, I want to pay the taxes on my money. Now, while taxes are still relatively low, then I'll continue to grow and earn interest on that money. And when I take money out in the future, I will not only taxes on it, I have already prepaid those taxes. So that's the essence of a Roth conversion. Now, should you consider this? Well, it depends on your situation. There's no blanket answer. My my thought is, yeah, I'd rather prepay Uncle Sam, get him out of my pocket. That way. Any interest that I earn, any growth that I have in my account going forward will not be subject to tax in the future. Also, there's something called RMDs required minimum distributions for those of you that have traditional accounts, let's say TSP. Once you've retired and hit age 72. You owe RMDs required minimum distributions. You have to take out a minimum amount of your account or your pretax dollars per year. Without receiving a penalty from the IRS or in order to avoid a penalty from the IRS. This is just a way for you to start paying some taxes if you convert money to a Roth. Or any kind of Roth IRA.
Val Majewski:
That money is not subject to RMDs. Now there's a weird thing with TSP where Roth TSP is still subject to RMDs, but you'll have to pay tax on those dollars. So the big thing, the reason why people would do a Roth conversion, avoid taxes in the future, or paying more taxes in the future. Because if you're retired and your goal is to stay at the same net income that you're making now, your same take home pay, then probably you're going to be at a similar tax bracket. Assuming taxes do not go up, you're going to be at a similar tax bracket in retirement. Well, if taxes do go up and you're making the same amount of income in retirement that you're making now. You're going to be paying more in taxes. Simple as that. So why not get Uncle Sam, your partner in retirement, whether you know it or not, Get him out of your pocket, convert money to a Roth IRA or do a Roth conversion. And now you've prepaid Uncle Sam. You've got him out of your pocket, and all your earnings, again, are tax free. So there's a there's a couple of bullet points that I want to go over as to why this could be beneficial. And I will say this again, it is not for everybody. I'm not going to recommend this for everybody, but it's something you should consider or at least look into.
Val Majewski:
So typically with a Roth IRA, there are earnings limits. There are contribution limits with a Roth conversion, those things do not exist. So if you had $1,000,000 that you wanted to convert, you can certainly convert $1,000,000 if you earned way too much money to contribute to a Roth IRA, you can still do a Roth conversion. The five year rule. If you go back and watch our previous episode on Wrath 101. That way I don't have to spend a ton of time to explain the five year rule, but five year rule still exists. Once that money is converted, it's got to stay in there for at least five years before you can start pulling out any interest earned. Taxes are paid up front. So like I said, you are prepaying your tax. Now, you might be thinking, Well, Val, if I had $1,000,000 in a qualified account, or even if it were $100,000 in my traditional IRA, traditional 41k, my traditional TSP and I convert all of that, you're saying I owe taxes on 100,000. I can't pay that. And that's a valid point. You can do something called partial conversions, partial Roth conversions, because, yes, typically if you have 100,000 and you want to convert all 100,000 instantly, 100,000 goes from pre tax money to tax free money. But you're going to get a tax bill at the end of the year and you're going to owe the tax on that amount that you converted and that's going to count as ordinary income and it could bump you up into a higher tax bracket, which may not be very good for you.
Val Majewski:
So actually you'd probably argue that it will not be good for you to pay more in taxes. But if you did partial conversions, let's go back to that 100,000, for example, and you said, okay, well, I want to convert 20,000 a year for the next five years. You can do that. You can piecemeal it. It doesn't have to be uniform either. You can do 30,000, one year, 10,000, the next 50,000 indexed and so on. Until it's all converted. So why would you want to do that again? It just it could be to avoid going into a higher tax bracket. It could be based on how much money you have available to pay those taxes or those tax liabilities. But the end result would be taking taxable money, making it tax free and going forward, knowing that you're not going to own any more tax on either that money or the interest that you're earning. So pretty awesome stuff. Why should you consider it? Because you're prepaying the tax. Getting Uncle Sam out of your pocket, turning your pre-tax money, your taxable money into tax free money. Question number two. Now, I've mentioned in a previous episode about a strategy that we're utilizing to help federal employees completely eliminate their debts, including their mortgage, so you can go back and watch that episode.
Val Majewski:
But we talked about a strategy to completely eliminate your debts, including your mortgage, in ten years or less, without spending any additional money than you're spending now. And posing that question of if that's something you'd be interested in. A lot of federal employees are interested in that. But how do you begin doing so well? First, let's back up and talk about why we're doing this. Interest rates are on the rise. We talked about the economy at the beginning of this, sparking some of these questions and the reason why we're we're now helping out with debt. We've always helped out with that. But it's now at the forefront of trying to eliminate it as fast as possible because interest rates are going up and up and up and up. And the higher the interest rate, the more money that's going to come out of your pocket. They're just going to the lender to pay interest. Ideally, you're thinking, okay, if I if I loaned out or if I got a loan for 1000, 10,000, $100,000, the lower your rate. Yeah. The less you're going to pay in interest. Even though that rate may not seem so high, if you had a 7% interest rate on 100,000, you're thinking, okay, well, 7% interest, doing some math, I'm going to pay back 107,000. That's definitely not the case.
Val Majewski:
When you look at the total payment and the total amount of money that you're going to be paying towards that debt, it's going to be a lot more than you think over that time that you're paying it back. So when we focus on not only benefits and retirement and making sure that you're saving enough money, preparing properly for retirement. But also we want to make sure we're having less money come out of your pocket to pay for interest that's going towards your debts. So if we can help on both ends, we can reduce interest that you're paying by eliminating your debt in a fraction of the time that puts more money back in your pocket that can then be put towards your future retirement. So we're covering you on both ends, but there's a great analogy that we've got. Let's look let's look at this. I'm going to give you a comparison. When it comes to debt versus retirement savings, some people would say, you know what, I'm just going to keep funneling money towards retirement savings because the interest on my debt is very low and I'm making more interest in my retirement. So why would I put more money towards debt to pay that off? Let's think about somebody that goes to the gym and gets a trainer, right? You can go to the trainer and you can talk to them about a strength exercise, cardio.
Val Majewski:
I want to get in shape. I want to get physically fit. I want to do all of this. And you can look at any trainer that you see, whether it's at a local gym, it's an online trainer, it's celebrity trainers. They're going to tell you the same thing. But using this analogy, you can say, I'm going to put as much effort as I can into my workout programs, into my training, and I'm going to get physically fit. Same way you get ready for retirement, I'm going to put as much money as I can towards my future, towards this program, towards my 41k, towards my retirement savings so that I can retire properly. But let's look at the analogy again. But let's say your diet, your nutrition. Was not up to par and you are still eating like crazy or eating things that were not good for you or eating things that were just not good. Contents, right. Not good ingredients, high calories, high fat content, high, whatever. Right. And it wasn't doing you any good. You are essentially playing for the tie or you still losing out no matter how much you worked out. It wasn't helping because you were still eating and putting too much in. No matter how much you work, you couldn't work what you were putting in off. You couldn't outrun your fork. I can't take credit for that. I'll take one of our representatives shared with me that story, but I'll say you can't outrun your fork.
Val Majewski:
No matter what workout program you have, if you're putting in too much garbage, you're not going to be able to work out enough to burn all that off and to see the results that you want to see. You need to change what goes in, right, in order to have the workout program positively affect you in the way that you want it to. In the same way. With our retirement, you can funnel so much money towards your retirement, but if you're not taking care of what goes out. And eliminating the interest that you're paying. And I would call that the extra fat content in this relationship here with this comparison to diet and exercise, retirement savings versus debt if you're not cutting out the fat. It's not going to do you any good. No matter how much you're saving, you're still not going to reach your full potential. So how do we do this? Right? We need to cut that interest. Focus on paying off the debt and making sure then that we can funnel that additional money once we've paid off the debt towards our retirement. So we're eliminating what we owe and we're super charging what our future's going to look like. So how do you begin doing so? Well, you've got to schedule a consultation with us because everybody's situation is different. So we need to look at all of your debts and essentially your federal benefits and retirement situation.
Val Majewski:
But when it comes to the debt elimination side, look at all the debts. It could be credit cards, car payments, student loans, mortgage or mortgages or other types of debts that you have. Look at the interest rates, the payments. Devise a plan to help eliminate that along with. Following extra money then towards your retirement when it's all said and done. So we have a comprehensive way in which we can help you cover you on both ends. And I would say it's eliminating debt while building wealth at the same time. We're not going to just throw everything towards the debt and that's it. We're going to be taking care of two birds with one stone. Now you need to schedule a consultation. We need to look at all the debts. List them all out, develop a programme for you. And we've got proprietary software to do that. Share it with you and then you can determine, yeah, this is a good fit for me and my family. Let's get going. And we begin the plan. Remain diligent to it, stick to it, and pay off one debt at a time and get it all all eliminated, ideally within ten years or less. So that's how we do it, right? It's not a simple one. Click and it's going to be done. There's a process, but we've got to start somewhere.
Val Majewski:
Schedule a consultation with us. I'm going to explain that at the end as well. We'll we'll put a link in the description so that you can book directly on our calendars so that we can look at not only your benefits and retirement situation, but help you eliminate those debts, get you out of the interest that you're going to end up paying towards those banks, those lenders. So great question. Great concerns we've been getting asked. Next question. I've heard the option B can get very expensive. Is that true? Now, if you've watched our finale video or, frankly, episode. Yes, absolutely. That is true. I had a federal employee recently asked me this question. They were hired within the last couple of years. They've heard from other people that they work with that if you have option B with your family and this particular federal employee did have option B. That is going to get pretty expensive now for this employee. They are young. We're effectively option B is very cheap. But as they get older, I was able to show them how much that cost will increase over time and how much will be coming out of their pocket in their paycheck in order to pay for option B. Now, if you're not familiar with option B, I would recommend highly recommend you go back to our previous episode about Fegley. But one of the mistakes that I do see federal employees make is paying way too much for the option B over the course of their working career.
Val Majewski:
If you're not familiar, again, check out the episode. But you can see how those costs increase drastically over time. And at some point, option B is going to become so expensive that you're going to cancel it for lack of a better term. You're going to get rid of it, eliminate it, because it's not going to be something that you're going to want to continue to pay for. There are ways in which you can save thousands, if not tens of thousands of dollars over the course of your working career by looking at alternative options compared to option B. Now, what can you do with those tens of thousands of dollars that you save that can be funneled towards your retirement? So our goal, as we've said this entire time, is to help you optimize or maximize your benefits. This is one way not paying too much for the option B, saving yourself thousands of dollars over the course of your working career, which then can be put towards your retirement. It's making yourself more efficient and more effective. Now, along with that, people have asked me, Well, I can get up to five times my salary within the government with option B, I've got basic. I've got everything that the government can offer. But how much life insurance do I need? Now, I don't know why.
Val Majewski:
We've been getting a lot of questions about life insurance. If it was because of the pandemic and people are just making sure they're covering all their bases, not not exactly sure the reason for the increase in this question, but it's a very, very common question now, how much life insurance do you need? I wish there was a blanket statement. I can say everybody needs $1,000,000 of life insurance. That would not be true. What everybody's needed is going to be different depending upon their situation. And there are ways that we can help determine that. There are things that we're going to look at within your situation, questions that we're going to ask you in order to quantify your need for life insurance. And then we can look at options to take care of that need. If you agree with that need, if you agree with that number. So how much do you need? It's different for everybody. The government does give you a couple of good options. We usually recommend keeping your basic and if you have option A keeping option A. But anything above and beyond that that you need to to make sure that you're covered for. We can take care of with supplemental life insurance. That's right for you and your situation. Because what Fegley offers is a group plan. It's group. Everybody's lumped together. If you're in good health or if you're in better health, then it's going to be more beneficial for you to find a individual private plan.
Val Majewski:
That's designed specifically for you and your situation, your family, your needs. So how much do you need? It's going to take us a little bit to determine that We need to, again, ask some questions, complete our fact finding mission so we can quantify for you, add up everything that we're looking to cover and for how long. And develop a comprehensive plan that's going to cover you from now through retirement up until the day. Unfortunately. Of your passing so that your family is taken care of every step of the way so we can determine that you reach out to us and fill out that form on our website. Federal retirement show dot com and we'll be in touch. And we can go over not only your full benefit situation, but your specific life insurance need. Very good question we've been getting asked. And since I just made this announcement recently, a lot of federal employees I've talked to, especially in group presentations when I'm mentioning that, Hey, I did a thing, I wrote a book about federal benefits and retirement, giving my perspective on what you need to know regarding benefits and retirement. My suggestions, it's called There's No Excuse Your Guide to Maximizing your Federal Employee Benefits. It's my perspective, right? There's a lot of information that is not opinion based in there.
Val Majewski:
A lot of just reference material that you need to know when it comes to benefits and retirement. But I also give you my twist, my perspective in the last decade plus of working exclusively with federal employees. On what I think you should do and how I think you can best align yourself during your working career so that you can retire on your terms, how you want to with the money that you want to retire with. So the name of the book, there's no Excuse. Again, your guide to maximizing your federal employee benefits. It's available on on Amazon and or or I would say if you want to just purchase it. Sure. Go ahead. You can can do so. You can buy it on Amazon. Or if you schedule and complete a full benefits and retirement review, you can receive a complimentary copy. So the question was, again, why? Why did I write this book? Well, it's been a long time coming. I've said that I've wanted to for a while. It just takes a little bit of time to dedicate to actually putting pen to paper or typing everything up. All of my thoughts, all of my experiences, all the information that I know now, I will tell you on the front end, I'm not going to claim to know every single thing. But through my experience of working with federal employees, I do know a whole lot.
Val Majewski:
I've worked with thousands of federal employees over my working career, and I want to share with you the information that I've learned that I've shared with other federal employees. And you can find it all in one place. Now, is it an end all, be all book? Are you going to find everything? I'm going to tell you no. I tried to make this very simple and easy to read. I tried to make it easy to understand. It's not a 500 page manual. I tried to put this in plain English so that you can make the best decisions for you and your family. If you have additional questions and things that are specific to your situation, I'd be happy to go over those separately on a one-on-one basis, but from general broad strokes. Point of view. This book, I think, is a great starting point for you to make sure that you're on the right track and heading in the right direction as you approach in your retirement. Now, whether you're the first day on the job, you just got hired yesterday or you're retiring tomorrow, there's something in this book for everybody. And I'm really proud to roll it out and to offer it to you all, because I think it will be a very helpful tool. And worst case scenario, a validation of the information that you thought you already knew. So it's available again on Amazon or by scheduling and completing a benefits and retirement review, you can get yourself a complimentary copy.
Val Majewski:
So we will put my email in the description. We'll also put a link where you can book directly on my calendar if you choose to do so, to book and schedule your benefits and retirement review. So a great question. I love that. I love the fact that I can say I wrote something. I put something out there. It's it is a cool feeling to say, hey, I did this right. But it is for you. It's not for me. It is for you, the federal employee, so that you can best set yourself up, best prepare as you're going along your working career. Well, thank you to all the federal employees that we've been talking to across the country. Thank you for the representatives that we have with American Benefits Exchange that have been coming to me with questions and sharing their experiences so that I can have our second episode of frequently asked questions. Faqs continue to submit those things. If you do have questions, you do have concerns. You have a very, very unique situation that you need help with. Reach out to us, Fill out the form on the website. We'd love to talk to you, love to help you and guide you so that again, you're making the best decisions and setting yourself up. I'm looking forward to seeing you on a future episode.
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